The Four Part Test for Getting Rid of Back Taxes in Bankruptcy
Let’s cut to the chase. For a personal income tax debt (federal, state and local) to be dischargeable in bankruptcy, the following conditions must be present. These are sometimes called the dischargeability “Rules.”
1. The tax at issue must be of the dischargeable kind (income taxes for instance) and the tax must have been due for more than three years before your bankruptcy case was filed. For example, 2009 income taxes become eligible for discharge on April 15th of 2013 because the 2009 taxes were first due on April 15th of 2010. If three years have gone by since the taxes were due, the timing condition to discharge has been satisfied.
2. The tax return for the tax debt at issue must have been filed more than 2 years before the bankruptcy case was filed. This is pretty straightforward, only tax years for which you’ve filed a return will be eligible for discharge.
3. The tax debt at issue has been assessed by the taxing authority for more than 240 days prior to the filing of the bankruptcy case (federal taxes are usually assessed within 6 weeks of the filing of the return, the States vary).
4. To get your tax debt discharged, you must not have attempted to evade the paying of the tax or filed a willfully “fraudulent” return. In other words, you must have fallen behind on your taxes in good faith and not as part of a scheme to game the system. This rule applies universally in bankruptcy cases, there are no circumstances in which the bankruptcy code allows fraudulent debts to be discharged.
In general, if the subject tax meets all of the above rules, it will be dischargeable in a bankruptcy case. There are other details and fine points that must be addressed thoroughly to determine whether a tax will be dischargeable under the circumstances applicable to your bankruptcy case.
Effect of Offer in Compromise
For example, there may have been “tolling events” that stalled the running of the time requirement that must be accounted for. For instance, filing for an extension of the time period in which to file the tax return or making an “offer in comprise” made to the IRS to settle the tax, extend the time periods in question pending acceptance or rejection and require a recalculation to be certain that the required time periods outlined above have been met.
Tax Return Must be Prepared Properly
The “tax return” filed must actually be an acceptable tax return, as opposed to a substitute for a return filed by the taxing authority for your or something else that might not actually qualify as the required filed tax return. There are many other additional details that must be examined. Even when taxes may be eligible for discharge for meeting all of the above criteria, if the taxing authority has filed a tax lien then the bankruptcy will not erase a properly filed tax lien entered before your bankruptcy case was filed. Your personal obligation to pay the tax debt may be removed by the bankruptcy case but the taxing authority’s lien on your property will remain and that lien will have to be satisfied upon the sale of the property.
Consult an Attorney if You Face tax Issues
For a proper determination about which taxes are eligible for discharge in a bankruptcy case, consult with a seasoned bankruptcy practitioner or IRS tax attorney. The above is only a brief summary of the basics regarding discharging taxes and is meant to alter you to the fact that taxes may, in the right circumstances, be discharged in Bankruptcy.
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